Moody's Downgrades HD Supply Holdings (HDS) Secured Ratings to 'B1'
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Moody's downgraded both HD Supply, Inc.'s (Nasdaq: HDS) Sr. Sec. Term Loan due 2021 and $1.25 billion of Sr. Sec. Notes due 2021, which are pari passu to each other, to B1 from Ba3, following the company's recent announcement that it will redeem its Sr. Unsec. Notes due 2020. In a related rating action, Moody's assigned a B1 to the company's proposed $550.0 million Sr. Sec. Incremental Term Loan due 2023, which will rank pari passu to HDS's other secured debt. HDS anticipates a reduced rate for both term loans relative to existing pricing. With the exception of maturity date, the incremental term loan will have the similar terms and condition as the existing first lien term loan due 2021. Proceeds from the incremental term loan, about $228 million of cash on hand, and $600 million draw under the company's senior secured asset-based revolving credit facility (unrated) will be used to redeem the company's existing 7.50% Sr. Unsec. Notes due 2020, at which time the rating for this credit facility will be withdrawn, to pay call premium, accrued interest, and related fees and expenses. HDS' B1 Corporate Family Rating, B1-PD Probability of Default Rating, B3 unsecured debt rating, and SGL-1 Speculative Grade Liquidity Rating are not impacted. The rating outlook remains positive.
We view the redemption of Notes due 2020 as a credit positive. HDS indicated cash interest savings are nearly $65 million per year. HDS will not begin to reap the benefits of these lower cash interest payments for another year, since it will pay cash for call premium, and related fees and expenses. Relative size of interest savings is meaningful when compared to total cash interest payments projected of around $300 million for 2016. Inclusive of the refinancing that saved additional interest payments earlier this year, adjusted interest coverage -- measured as EBITA-to-interest expense -- improves to nearly 2.75x on a pro forma basis from 1.9x for LTM 1Q16.
..Issuer: HD Supply, Inc.
....Senior Secured Bank Credit Facility, Assigned B1 (LGD4)
..Issuer: HD Supply, Inc.
....Senior Secured Bank Credit Facility due 2021, Downgraded to B1 (LGD4) from Ba3 (LGD3)
....Senior Secured Regular Bond/Debenture due 2021, Downgraded to B1 (LGD4) from Ba3 (LGD3)
The downgrade of the company's secured debt to B1 from Ba3 results from the reconfiguration of the company's debt capital structure. Term debt, which is being increased to about $1.4 billion from $844 million, and Sr. Sec. Notes due 2021, now represent the preponderance of debt in HDS' capital structure. In addition, the reduction of unsecured debt by $1.275 billion decreases the amount of first-loss absorption in a recovery scenario relative to the secured debt, further warranting the downgrade.
HDS' SGL-1 Speculative Grade Liquidity Rating remains appropriate at this time, despite the company using $828 million of liquidity, $600 million revolver borrowings and $228 million of cash hand, to facilitate the redemption of its Notes due 2020. Moody's still expects operating cash flow is more than sufficient to fund its normal operating requirements and capital expenditures to support ongoing demand and growth initiatives. Excess cash flow will be used to reduce revolver borrowings.
The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in December 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
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